The Hershey Company (NYSE:HSY) Is A Sweet Buy For Your Income Portfolio

The Hershey Company Is Focused On Growth

The Hershey Company (NYSE:HSY) has been a lagging stock during the rebound and that is a surprise. The company is focused soundly on treats and sweets but it is also a diversified play on snacking with growth in its sights. The company has been working to realign its portfolio of brands to better today’s consumer, an effort that has been paying off, and the evidence is in the results.

"We had a strong third quarter, with accelerated reported net sales growth of 4%, adjusted diluted EPS growth of more than 15% and confectionery share gains across markets, including an almost 190 basis point gain in the U.S … We also saw sequential improvement in the areas of our business hit hardest by COVID-19, including our international markets, owned retail locations and foodservice business," said Michele Buck, The Hershey Company President, and Chief Executive Officer. "We are continuing to focus on executing with excellence, investing in the business, and advancing our strategic priorities to deliver a strong fourth quarter and position us well for 2021."

The Hershey Company Beats, Guides Higher

The Hershey Company produced a very solid 3rd quarter despite the impact of COVID on holiday plans. If anything, the company’s decision to “lean into” the Halloween season, as CEO Michele Buck said, aided results and helped drive brand awareness for the company. On the top line, revenue came in at $4.22 billion or up 4.2% from the previous year on volume and pricing gains.

Not only did the company produce growth, but the growth was more than double what the analysts expected. At the organic level, growth was closer to 3.8% compared to the consensus of 2.5%. On a segment basis, NA grew 6.3% while International fell -14.4%. Acquisitions and divestitures had a 0.8% impact that was offset by a -0.6% impact from FX.

Moving down, the company’s margins expanded due to higher realized pricing gains. Pricing gains added 2.9% to the top line and expanded gross margins by 60 basis points and operating margins by 220 bps. The company’s net income from operations came in at a gain of 39% to drive better than expected earnings. On the bottom line, the adjusted earnings of $1.86 beat by $0.14 which is nice enough by itself. Add in the GAAP earnings of $2.14, better than consensus by $0.42 or 25%, and the decision to refocus the portfolio looks better than ever.

Perhaps the best news for investors is the decision to reinstate guidance. The company says to expect revenue growth in the range of 1.0% for the full year, more than 100 basis points above the consensus, with adj EPS in the range of $6.18 to $6.24 versus the $6.03 consensus.

Hershey’s Dividend Is Growing

Unlike so many other company’s this year, The Hershey Company didn’t have to cut or suspend its distribution and in fact, increased it for the 11th consecutive year. If you discount the short pause in increases that occurred around 2008 this company has been increasing the payout annually for over 30 years. And the outlook for another one is very high. The payout ratio is running just over 50% so no worry at face value and the balance sheet is in good shape too. The company has been using leverage but it is well under control and the cash balance and coverage ratios are high.

The Technical Outlook: The Hershey Company Is Moving On Up

Shares of The Hershey Company made a strong rebound from the March lows but have struggled in the time since. Trapped in a range below the pre-COVID high it doesn’t look like we’re going to see the same gains as say a Hormel (NYSE:HRL) or Clorox (NYSE:CLX). That said, the 3Q news has shares up 2.5% and confirming support at the short-term moving average with an upside bias in the indicators. In the near-term, investors should expect to see price action retest the top of the range. If a new high can be set a move up to the February highs is next.